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Saturday, September 6, 2008

Recession: US May Dodge Bullet But Europe May Be Hit

Source : The Business Times, September 6, 2008

THE global outlook is pretty dismal, to be sure, but Conference Board president Gail Fosler does have a spot of 'good' news: the US economy is stabilising, with no recession in sight.

MS FOSLER : This is really a period of rolling adjustment that goes from sector to sector that will keep the US growth rate low

But make no mistake: with GDP growth forecast at 1.6 per cent for 2008 and 1.3 per cent next year, the US economy will remain stagnant for the foreseeable future, she told a Singapore audience yesterday.

And outside the US, the risks of a sharp global downturn have risen, with China, in particular, seeing 'one of the most pronounced slowdowns', she said.

Since the beginning of the year, New York-based Conference Board - a business research organisation of which Ms Fosler had been chief economist since 1989, and is now president - had taken a 'fairly firm but controversial' position that the US was not in a recessionary environment, slowdown notwithstanding.

But the US will be in a 'relatively slow growth mode for the foreseeable future'. The Conference Board's forecasts see the American economy growing under one per cent for at least three quarters through early 2009.

The opening speaker at the CapitaLand International Forum, Ms Fosler said the sharp US slowdown and recessionary risks are, in her opinion, not due primarily to the credit crisis nor even the loss of housing equity.

'The spiking of gasoline prices has exerted pressure on consumer incomes,' she noted. And with oil prices, and hence gasoline prices, beginning to ease, chances are consumer sentiment will improve, she said.

People are probably surprised that the US economy has managed to maintain growth through the period of housing turbulence, she said. And that's in part because its 'obviously manifest structural weaknesses in the financial and housing sectors' have been offset by 'advanced structural strengths in the business sector', she said.

'So the US is being carried, in some sense, by a structural productivity or momentum that is actually helping to sustain output and income' - even while the turmoil in the housing and financial services sectors eroded employment and other economic numbers, Ms Fosler added.

But the chickens coming home to roost are sort of doing it one at a time, she said. So while the housing woes may be bottoming out, and it looks like the financial challenges may be '75 per cent through', now the tax and manufacturing sectors are starting to weaken, she said. 'So this period is really a period of rolling adjustment that goes from sector to sector that will keep the US growth rate low, in the 1-2 per cent range, for the foreseeable future,' she said. And 1-2 per cent in the US context 'feels like recession even if it's not technically a recession'.

But the Conference Board's global indicators are signalling even sharper slowdown elsewhere, she pointed out. The Euroland indicator, for example, is moving towards recession. And Europe, in some ways, is in somewhat greater peril because, unlike the US, it doesn't quite have a productivity ballast. 'Part of the weakness we see in the US and Europe is becoming a global phenomenon that is moving from country to country' - sequentially, she said.

Europe's housing sector is 'actually falling as fast as the US housing sector', and the slump is now taking place in Australia, Ms Fosler noted.

Overall, the global economy is headed into a permanently high inflation environment. But it's in China that perhaps the slowdown is 'more significant than conventionally recognised' , she said.

'You've seen the first significant erosion in business confidence in China since the Asian financial crisis.' This is also reflected in the willingness of Chinese officials to reverse a lot of their policies put in place earlier to restrain the booming economy, she noted.